Setting up so spouse can contribute to Solo 401k

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lext
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Setting up so spouse can contribute to Solo 401k

Post by lext » Sat Jan 28, 2017 3:47 am

I've tried to read about the topic (there's one thread here too:
viewtopic.php?f=2&t=87799) but I'm still pretty confused about the details, in particular the little details that everyone seems to always assume. Thanks for any guidance.

OK, this is my scenario and what I'd like to happen:
- I have a full time job where I max out my employer-provided 401K
- I have a consulting gig on the side where both my wife and myself contribute
- At the end of the year, I get a 1099-MISC from the consulting gig, where the sole recipient of the money is me
- I would like to distribute some of this money to my wife as her income, and at the same time put all that income into a Solo 401k for her

I'm not sure what is the best way to go about it to reduce the amount of paperwork I have to do. Certainly I don't want to treat her as a regular employee with tax withholding and FICA and the likes. All I want to do is to somehow channel all the income she's due into a Solo 401k in her name.

First up, I don't know how to channel some of the money to become her income, other than creating a business identity as partnership and then file partnership tax filing to distribute some money to her. I don't want to do that if I don't have to. Is it possible for me to just put it in some form/schedule that "my wife has this income that was not subject to withholding"?

Secondly, the Solo 401K. I know I can create one where I am the administrator and employer. I've occasionally read online that 401k can be for "owner and his/her spouse". But when I look at the form to open a new 401k account (for example: https://www.fidelity.com/bin-public/060 ... ct-app.pdf), I don't see a checkbox that says "I'm the spouse of the owner/employer". Instead the form only asks if you're employed by someone (meaning there is an "employer", or you're self-employed.
If she puts down "self-employed", does that mean the whole Solo 401K has to be in her name, with her being the administrator etc? But I thought you can do Solo 401k for your spouse too, no?
If she puts down "employer", then the employer will have to be me. Then does that mean I'll have to establish employer/employee relationship with her, including issuing W-2 and perform tax withholding and unemployment insurance and the likes? That sounds like a massive amount of paperwork over nothing.

Do I make sense? All this is so confusing.

sport
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Re: Setting up so spouse can contribute to Solo 401k

Post by sport » Sat Jan 28, 2017 7:57 am

lext wrote:- I have a consulting gig on the side where both my wife and myself contribute- At the end of the year, I get a 1099-MISC from the consulting gig, where the sole recipient of the money is me
Since your wife contributes to the consulting gig, can you ask your client to split your compensation between the two of you? That would create separate income for her without any fancy arrangements. It would also not cost the client anything extra except for the cost of generating a second 1099.

notmyhand
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Re: Setting up so spouse can contribute to Solo 401k

Post by notmyhand » Sat Jan 28, 2017 9:18 am

I believe all income that goes into a solo 401k is subject to FICA. I have an s corp with a solo 401k and it is the case and I believe the same would apply if filing schedule c.

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Sat Jan 28, 2017 9:21 am

There is no need to pay a spouse as a W-2 employee or to go to the complexity forming a partnership and filing partnership returns and K-1s. Likewise, trying to convince a client to pay the two of you separately is a solution in search of a problem that does not exist.

The IRS has already created a structure specifically designed for your circumstances. Look up "Qualified Joint Venture" in the IRS Schedule C instructions.

The two spouses simply allocate a sole proprietorship's revenue and expenses between themselves. Each of them complete a separate Schedule C and Schedule SE. Then each have their own net self-employment income to make retirement plan contributions.

With any business retirement plan such as a solo 401k, there is always an employer and employee. Whether there is one or two spouses in a business, the business adopts the plan and then the spouse(s) open an employee account of that solo 401k plan.

Note: Each spouse must "materially participate" in the business. This can be easily accomplished with one spouse working >= 500 hours on a task(s) predominantly done by them. Also, the allocation on the Schedule Cs and SEs does not have to follow the percentage of work hours .

pshonore
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Re: Setting up so spouse can contribute to Solo 401k

Post by pshonore » Sat Jan 28, 2017 11:25 am

Just a reminder that if the business is formed as a state entity (LLC), you cannot do the Joint venture option.

https://www.irs.gov/businesses/small-bu ... businesses

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Sat Jan 28, 2017 11:36 am

Unless you are in a community property state.

lext
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Re: Setting up so spouse can contribute to Solo 401k

Post by lext » Sat Jan 28, 2017 4:02 pm

sport wrote:
lext wrote:- I have a consulting gig on the side where both my wife and myself contribute- At the end of the year, I get a 1099-MISC from the consulting gig, where the sole recipient of the money is me
Since your wife contributes to the consulting gig, can you ask your client to split your compensation between the two of you? That would create separate income for her without any fancy arrangements. It would also not cost the client anything extra except for the cost of generating a second 1099.
She contributes, but not outwardly. So it will be awkward/illogical to ask the client to issue a 1099 to someone they don't deal with and know nothing about. I know my wife helps me, and I want to distribute some of the money to her for that helps, but it's not something official or easily billable.

lext
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Re: Setting up so spouse can contribute to Solo 401k

Post by lext » Sat Jan 28, 2017 4:13 pm

Spirit Rider wrote:There is no need to pay a spouse as a W-2 employee or to go to the complexity forming a partnership and filing partnership returns and K-1s. Likewise, trying to convince a client to pay the two of you separately is a solution in search of a problem that does not exist.

The IRS has already created a structure specifically designed for your circumstances. Look up "Qualified Joint Venture" in the IRS Schedule C instructions.

The two spouses simply allocate a sole proprietorship's revenue and expenses between themselves. Each of them complete a separate Schedule C and Schedule SE. Then each have their own net self-employment income to make retirement plan contributions.

With any business retirement plan such as a solo 401k, there is always an employer and employee. Whether there is one or two spouses in a business, the business adopts the plan and then the spouse(s) open an employee account of that solo 401k plan.

Note: Each spouse must "materially participate" in the business. This can be easily accomplished with one spouse working >= 500 hours on a task(s) predominantly done by them. Also, the allocation on the Schedule Cs and SEs does not have to follow the percentage of work hours .
Thanks, this sounds very promising :) But let me clarify with you the details.

Say, I get $10K on the 1099-MISC. It will be OK to just file Schedule C for $5K for each of us, without another filing to the IRS that says "I got 10K, but I paid $5K of that to this person"? I just hope I don't have to issue either 1099 or W-2 to her.

Second, like you said on the Solo 401k there will be an employer and employee. I can open one with me as administrator, and she can join as participant and employee. Do I need to do something to "prove" that she was an "employee"? Because obviously she wasn't, in the traditional sense of the word, and she got no W-2. My concern is if I didn't treat her like a regular employee, then she's not entitled to check the box "I am an employee" on the form.

ETA:
I'm understanding you a bit better now. So you're saying, an entity can be both an employer and employee at the same time. I can establish the Solo 401k as employer and administrator, but when I file the form to join it myself, then I can put down my name as "employer"? But there already a checkbox that says "self-employed" on that form.
So if I understand you correctly, this is how I should do it:
- Get an EIN for myself
- Open Solo 401k with myself as administrator/employer
- Ask her to fill the "join 401k" form as employee of my business
- (And if I want to, I can also fill the "join 401k" form for myself, as "self-employed" entity)

Does that sound right?

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Sat Jan 28, 2017 6:35 pm

Remember, you must each file a Schedule C and a Schedule SE. The two Schedule Cs must allocate both revenue and expenses.

There is no requirement to prove employment status to the solo 401k provider. It should not matter whether your spouse is a W-2 Employee, or also a self-employed individual who by definition is also an employee.

There really should be two steps with a solo 401k:
  1. You complete a solo 401k plan adoption agreement.
  2. You open one or more "employee" accounts.
I don't know how to complete the forms at other providers, but at Fidelity you would:
  1. Complete Fidelity self-employed 401k plan adoption agreement as employer/administrator.
  2. Complete Fidelity self-employed 401k account applications
    1. New Account—New Plan
      • Establish a new SE 401(k) Plan account
    2. Add an Account to an Existing Plan
      • Add spouse or an additional owner to an existing SE 401(k) Plan

lext
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Re: Setting up so spouse can contribute to Solo 401k

Post by lext » Sat Jan 28, 2017 8:00 pm

Thanks. Yes I understand that I need to file both Schedule C and Schedule SE for each of us. I was just wondering how to "tell" the IRS that "5K was paid to this person". Isn't it a requirement that the "payer" notified the IRS of that fact?

Take an example: I have the consulting gig. I got 10K throughout the year. At the end of the year, the client filed a form with the IRS (I don't know which form) that says "we paid Mr. Lext, EIN xxx-xx-xxx, 10K in the year 2017". At the same time, they send me a form that says "we paid you this amount, and the IRS already knows that".

Now, if my wife is not in a partnership with me (or some form of business entity like LLC), then how can we tell the IRS that she has this income legitimately (if it is a requirement that the IRS needs to be told)? Now, I would love it if we don't have to tell IRS anything, and simply split the money and file the Schedule C/SE and they'll just "know" that the 10K money from my client has been split. I just don't know if that is that case and that it will be alright in the IRS's eyes.

(If we form a partnership or business entity then I know this is a non-issue, but I'm just trying to avoid having to file 1065 and K-1).

As for the process of joining the Fidelity Solo 401k, my question is with what to put in "Income Source" on page 3 of that form (in my first post). I guess since my wife will file Schedule SE, she'll have to put it as "self-employed", right? So technically she's not my "employee", but she can still join a 401k Plan that I established and administer?

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Sun Jan 29, 2017 1:27 am

The fact that each of you has your own Schedule C and Schedule SE, "reports" to the IRS the source of each of your incomes. The IRS states that by each of you filing both forms, you are electing to be treated as a joint qualified venture. There is no other action to be taken.

Yes, you should both put self-employed as your income source. That is what both of you are. If they were to inquire (which I doubt), you just tell them you have a qualified joint venture.

dool34
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Re: Setting up so spouse can contribute to Solo 401k

Post by dool34 » Sun Feb 18, 2018 12:40 am

Just seeing this thread and had a follow up. If I am set up as an LLC (community property state) as a qualified joint venture with my spouse working 500 hours a year (but I'm working more than that), would I:

1) have a greater percentage of the QJV for me (e.g., 75/25)?
2) both my spouse and I have regular jobs and max out regular 401ks. We have enough business income for us to both get the "employer" match from the solo 401k. On what basis is the employer match based? For example, if we do a 75-25 split, does that mean I would get more of the employer match? Or can my spouse just meet the 500 hour test and get the full 55,000 contribution (assuming income is great enough, e.g. 20% of business income could support us both maxing out employer contribution)

Thanks!

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Sun Feb 18, 2018 3:53 pm

  1. To my knowledge the IRS has never specifically addressed this in guidance or publications. The CPAs I trust suggest having a QJV agreement like you would have a partnership agreement. This agreement could specify a QJV allocation to be; fixed interest (50:50 default), based on hours worked, or any other reasonable deterministic allocation.
  2. You each complete a Schedule C and a Schedule SE allocating business income and expenses according to your allocation interest. You each have separate net self-employment earnings = Schedule C Line 31 - Schedule SE (Section A Line 6 or Section B Line 13). You each have a separate maximum employer contribution = 20% * your individual net self-employment earnings.

dool34
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Re: Setting up so spouse can contribute to Solo 401k

Post by dool34 » Sun Feb 18, 2018 10:12 pm

Thanks SpiritRider. If I understand your advice in #2 right, is there any reason not to do a 50-50 split? That's the default and would allow my spouse to contribute more. While I do more of the work, it'd be great to be 50-50 partners with her (which aren't we anyway because we live in a community property state).

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Mon Feb 19, 2018 12:18 am

A 50:50 allocation is actually the most defensible allocation. Remember that both spouses must meet the material participation standard. The business would need almost $600K in business profit for two spouses split 50:50 to both make the maximum $55K employer contribution.

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tfb
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Re: Setting up so spouse can contribute to Solo 401k

Post by tfb » Mon Feb 19, 2018 2:01 pm

pshonore wrote:
Sat Jan 28, 2017 11:25 am
Just a reminder that if the business is formed as a state entity (LLC), you cannot do the Joint venture option.

https://www.irs.gov/businesses/small-bu ... businesses
Spirit Rider wrote:
Sat Jan 28, 2017 11:36 am
Unless you are in a community property state.
My reading of QJV and Rev. Proc. 2002-69 is when both husband and wife are members of an LLC:

- Outside a community property state: treat as partnership, file 1065

- In a community property state:
(a) treat as partnership, file 1065; OR
(b) treat as a sole prop under one of them, file one Schedule C

QJV is not an option either way.
Harry Sit, taking a break from the forums.

Spirit Rider
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Re: Setting up so spouse can contribute to Solo 401k

Post by Spirit Rider » Mon Feb 19, 2018 4:59 pm

tfb wrote:
Mon Feb 19, 2018 2:01 pm
My reading of QJV and Rev. Proc. 2002-69 is when both husband and wife are members of an LLC:

- Outside a community property state: treat as partnership, file 1065

- In a community property state:
(a) treat as partnership, file 1065; OR
(b) treat as a sole prop under one of them, file one Schedule C

QJV is not an option either way.
The IRS most definitely allows LLCs in a community property state to elect QJV status. You are misinterpreting Rev. Proc. 2002-69, Even though it predates QJVs (2007) the IRS has held that this guidance specifically allows an LLC in a community property state to be considered a qualified entity described in section 3.02 of that revenue procedure. Allowing the LLC to be treated as a disregarded entity to be able to elect QJV status rather than a partnership.

SECTION 4. APPLICATION
.01 If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is a disregarded entity for federal tax purposes.
.02 If a qualified entity (as described in section 3.02 of this revenue procedure), and the husband and wife as community property owners, treat the entity as a partnership for federal tax purposes and file the appropriate partnership returns, the Internal Revenue Service will accept the position that the entity is a partnership for federal tax purposes.

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tfb
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Re: Setting up so spouse can contribute to Solo 401k

Post by tfb » Mon Feb 19, 2018 5:51 pm

Spirit Rider wrote:
Mon Feb 19, 2018 4:59 pm
Even though it predates QJVs (2007) the IRS has held that this guidance specifically allows an LLC in a community property state to be considered a qualified entity described in section 3.02 of that revenue procedure. Allowing the LLC to be treated as a disregarded entity to be able to elect QJV status rather than a partnership.
Thanks. I misunderstood what happens after you make it a disregarded entity.
Harry Sit, taking a break from the forums.

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